US consumer prices increased 3.3% in March amid high oil prices linked to Iran conflict

CPI inflation report: US consumer prices recorded their sharpest rise in nearly four years in March, reportedly driven by higher oil prices linked to the conflict with Iran and the continued impact of tariffs, reducing the likelihood of an interest rate cut this year.

The Labour Department’s Bureau of Labour Statistics reported on Friday that the Consumer Price Index (CPI) climbed 0.9% last month, the biggest increase since June 2022, when prices surged in response to the Russia-Ukraine war. This followed a 0.3% rise in February. On an annual basis, consumer prices increased 3.3% in March, up from 2.4% the previous month, according to Reuters.

The figures were in line with economists’ expectations in a Reuters poll, which had projected a 0.9% monthly rise and a 3.3% year-on-year gain. The uptick in inflation came after a strong rebound in job growth, indicating that the labour market remains resilient.

A prolonged Middle East conflict could weaken the labour market, particularly if rising prices prompt households to cut back on spending, raising worries. The US-Israeli war with Iran has driven global crude oil prices up by more than 30%, pushing the national average price of gasoline above $4 per gallon for the first time in over three years.

Although President Donald Trump announced a two-week ceasefire on Tuesday, contingent on Iran reopening the Strait of Hormuz, the agreement appeared uncertain. The rise in prices last month reflected only the immediate impact of the oil shock, which has also driven up diesel costs.

March’s sharp rise in prices highlighted the growing affordability pressures on consumers. Trump had secured a decisive win in the 2024 presidential election on a promise to bring down costs.

The Consumer Price Index (CPI) increased by 0.2% in March, matching the rise recorded in February, leaving out the volatile food and energy categories. This resulted in an annual increase of 2.6% in the core CPI.

The relatively modest uptick, following a 2.5% year-on-year rise in February, is unlikely to reassure officials at the US Federal Reserve, as inflation is expected to pick up in April with the broader impact of higher oil prices feeding through the economy. The Fed uses the Personal Consumption Expenditures (PCE) price index as its benchmark for the 2% inflation target, and those measures also showed solid monthly gains in February.

Both core CPI and PCE inflation have been influenced by companies passing on part of the cost of Trump’s wide-ranging tariffs to consumers, counteracting the easing trend seen in rental prices.

Middle East war to raise core prices through expensive jet fuel?

Economists anticipate the ongoing Middle East war to push core inflation higher in the coming months, driven by rising jet fuel costs that could increase airfares, as well as higher diesel prices that would raise the cost of transporting goods by road. Prices of items such as fertilisers and plastics are also likely to climb, the report said.

With inflation showing signs of strengthening, some economists now believe the Federal Reserve may refrain from cutting interest rates this year. This view was reinforced by the minutes of the Fed’s March 17–18 policy meeting released on Wednesday, which indicated that a growing number of policymakers last month considered the possibility that further rate hikes could be necessary.

The Federal Reserve kept its benchmark overnight interest rate unchanged in the 3.50%–3.75% range. Some economists still believe a rate cut is possible if labor market conditions weaken. Others say that if higher gasoline prices reduce consumers’ purchasing power and lead them to scale back spending, businesses may struggle to pass on rising costs driven by higher oil prices.

(With inputs from agency)